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Permadeath is what you need.

And you probably don't, but give me a dozen paragraphs or so to convince you. But first I have to make something clear. I totally agree with you that permadeath will not work in a modern MMORPG, let alone add anything to it. We have to do more than just delete your character after 1 death, to utilize all the potential of permadeath and make a better game. This is vital to understand when creating a game with permadeath. It isn't permadeath itself that is good, it is what it allows you to do.

I'm going to start the party with a couple of statements that may either be right or wrong. If I am totally wrong on all of them, then you should probably leave the thread and find something else to read, if not, then keep reading.
When you play a game you want to feel something. Feel that you are achieving something and filling some kind of purpose.

You would like to be THE hero instead of just A hero.
You enjoy seeing you progress, but even more so when others recognise your progress and strength. After all, nothing is better than t-bagging the enemy player that you just vanquished, amirite?
The game is good for the ride, but in the end, when all quests are done, mobs slayed and gear obtained, there really is nothing more to do.
You would like the be the MOST powerful character and totally squash anyone who dared oppose you.

Next I will describe the experience of the average MMORPG for you:
"'Ding!'... ahhh, the sweet sound of leveling. Now you are strong and powerful right? This is what MMORPG's are really about isn't it? That moment when you gain a level and are stronger"... You think this to yourself, and maybe if you think a little more you realise that you are actually just as strong as you were before, because with the level comes the obligation to take on stronger mobs. Mobs that are equally more strong. Not really a thrill is it? But there are other ways to feel the thrill in MMORPG's aren't there? Maybe you get a two second thrill when you win a PvP match or finish off a quest, but that is really as far as it goes. While you walk around killing mob after mob, who all respawns two seconds later in the exact same spot with the exact same skills, you feel nothing. And then when you return two seconds later to do the exact same thing with the exact same outcome, you might realise: Wow... this is crap. However, it is like it has always been, and there is nothing better so you don't give it any afterthought and play on - this is how MMORPG's are supposed to be, right?
You walk around hour after hour doing the quests, saving the queens and kingdoms, and beating the bad guys. Except you don't. Twenty seconds later they respawn and another 'hero' sweeps in and 'saves the day'. They create kingdoms and wars for your entertainment, but in the end it is as if they made you a cake and you thought "Wow, is that cake all for me!?" and then you look around and see that everyone got the exact same cake, and btw, over there is another group who all has a different cake, that looks different but actually tastes the same, and all of a sudden you realise that you actually would rather have pie...
Then, after hours and hours of grinding and doing the quests that millions have done before you, you finally arrive at the top. You are max level and everyone looks to you and thinks: "Wow, he is so cool and I wish I had wasted just as much time as he has on this game already". Oh yeah. I forgot the million others who is also at max level! and who don't give a shit because, in truth everyone can get there. You stop playing and find something else to do, and everybody forgets that you every spend even a single second on that game. There is nothing more to do, and you move on to the next themepark. Lets be honest - your character might aswell have permadied.

This is the destiny of the modern MMORPG character. Kill all the mobs, save all the kingdoms, perish all the nasty-loking-mobs, and aquire all the gear-that-is-way-to-big/skimpy-to-actually-be-practical-but-gives-you-10-instead-of-9-strength-so-why-not. And then stop. Forget it ever happened and waste you time on something else. You are contempt. Don't fix what ain't broken right? No. Not right. Why not go for something better? Here is what an MMORPG experience should look like:

You wake up, sun flashing in your eyes and blink a couple of times waiting for your eyes to adjust to the light. You swing the legs over the side of the bed and take a deep breath. Suddenly you think: "I want to do something new today... Something I've never done before... I want to go on an adventure!". Your new character is unskilled but has the possibility to do anything. You choose to... go hunting! You establish a deal with the local leather armorer to provide him with hides regularily, and you live off the thrill of the hunt for the next month (or week or day or whatever). Then you realise: "I've become pretty good at shooting with an arrow and sneaking... Maybe I should become an assasin? You say your goodbyes to the local townsfolk who you've come to know and like (or hate) and depart to the nearby capital. Upon arrival you seek out the local tavern to find out who's in charge of who. On the way there you randomly spot a group of thugs trying to mug a lady. Being in a good spot you pull out your bow and arrow and shoot them down. You have aquired a friend. She helps you find the person in charge of covert operations in that specific settlement. And you get a position. A month later, you recieve a special job. Assasinate the king of your rivaling kingdom. You carry out the task, and as a result the rivaling kingdom is added to yours and you recieve a great price and a place to call your own. You decide it is time to study the art of magic. A couple of weeks later you recieve word of a dragon nearby. You and a squad of soldiers are tasked to kill it. You die but with your last breath you realise that your final spell has taken the beast down too. A statue is erected in the town square as a memory to you and your eforts to the kingdom.

This could be the story of any game. However it is not. It is one of the billion ways the story of your MMORPG should be able to unfold. If you decided not to save that lady it should've gone a totally different way. Or if you had decided to go to another kingdom, or not to study magic. Your choises have to matter.
"But how can this ever be? No amount of scripting can make this possible?!"... Not true. The world just has to be player driven and ever changing.

Making it player driven is 'easy' enough. Leave the tedious tasks to the npc's (shopkeeping, guard duty, scribing), and give the positions that matter to the players (Kings and queens, assins, dragons, crafters/suppliers of inventory). And allow them to do anything with the world that is realisticly possible (build cities, destroy cities, cause a demon invasion and that kind of stuff).

Making it dynamic and every changing is a little more difficult, especially programming wise, but it is possible. First you need the fauna and flora of the world to be dependant on player actions (dynamic spawning) so monsters don't just spawn over and over again in the same spot. Second, you need to make the world persistant. Don't revert the world to the same state when the clock strikes twelve, but let it evolve and expand at the players touch. Third, you need to give the players an incentive to play against eachother. There won't be any excitement if everyone is just happily holding hands and cultivating the world together. Make a race that has a reason to hate the other race(s) and watch history unfold as they battle epic battles. And fourth, you need Permadeath.

Without permadeath the king will never die, and you have the same problem as you had when he was an NPC. The cities will never fall, and the enemies never die. The world has become static again, and once more, all you can do is watch as player after player attain max level and as the world is filled out with cities of epic proportion and space is running out you have another themepark to run thorugh and forget. No one will ever raise a statue of memory, because your character is still there. Right until you get bored and stop, and everybody forgets him. You could say that permadeath makes you "quit (or die) while you are ahead". Go down with grandeur and for a purpose instead of waiting until there are no more purpose.

Another thing permadeath allows, is for different character paths to be 'overpowered'. By simply making magic equally harder to achieve and retain, you can make it what magic has always been supposed to be. Why should a knight in shiny armor be able to kill a mage who wields the power to crush mountains and summon demons? (unless he sneaks up and cuts his throat maybe). Dragons. The mighty beast that nobody can be because nobody can stop them then. If becoming and staying a powerful dragon is sufficiently difficult, then that is not a problem. The power rage will be over when enough weaker characters pull themselves together and ally to kill the beast.
Some say that we get bored with games because there is nothing new to do. A game like this won't have that problem, because the players create the new things to do. As the world evolve, the array of posibillities that a player has evolves with it.

Yet another thing that should be in a game like this is a classless system (skill based). Let every character learn what they want with the right amount of practice. There is no reason to arbitarily limit you to one path, and there is no danger of one player becoming a master of everything if you just make the hardest achievents hard enough. Let those who are willing to take a chance and has the skill be rewarded, and let the more casual players do whatever they want.

Now, to address the inevitable complaints.

"There is nothing fun in spending hours to become strong, then lag for a second and loose it all". There is ways to avoid this. One could be allowing you to have a 100 lives instead of just one, and another could be watching your ping, to determine if it was lag that was the cause.

(Followup) "When I die all is lost, why would I want that?". First of all because it allows for all of the above. Second, it makes strong being prestigious - would you really rather be just as strong as millions of others all the time, than being the strongest and most feared/influential for a while while you crush all your oppenents and have everyone else look up to you and want to be you? Third, you don't actually loose everything. You still have the connections you had before, and you and your community have still achieved all the things they had before you died. The game changer is letting the player achieve something that is not bound to his character (like levels). Fourth, try a different path. Focus on another skill, and try a different playstyle. The amount of ways you can replay are infinite becaus they rely on the community and state of the world. Nothing will ever be the same.

"Why would I want to roll a new character". This world is persistant. All the achievements that your character has done are still there. The kingdom you helped fund, the village you saved from that dragon, and your good friend and mastersmith Alvar. You will remember it all and it will be visible. Other than that the world will be totally different from what it was before, and so will your experience. Like playing a new game.
"I want to see my character grow and evolve. Perma-death does not allow for that." This is exactly what it allows for. It allows for the game to give you the option of becoming even more powerful if you have the skill for that.
Permadeath is not here to limit the game for you as many thinks. It is simply a means that allows the developers to create an even better game, not something that is there for a convienience for them. So bring it. Throw your anit-permadeath trash at me, and let me enlighten you

To those who are concerned with griefers:
I'm sure that there is mutliple ways to counter griefing, and I am going to list one combination here (inspired by Trials of Ascension).
Don't show what level/strength other characters have. If this is the case the griefer would not be able to attack low level targets, and would either die more often than kill, or have to spend time and lives getting to a stage where he would be powerful enough to kill more often than be killed, and at that stage still die sometimes, eventually perishing. Second part of this solution is making combat more reliant on strength and tactics than skill. Don't make players able to take a billion hits because he is 40 levels higher than the next player. If you get your head chopped off you should always die, and even the lowest leveled player should be able to cut the throat of an unprepared and unfocuesed high level player.
This is just one solution, and I believe there is more.

I actually don't like being THE hero of MMORPGs usually. (IE: "Chosen One", etc.) I don't like forced open world PVP, because it encourages griefing and trolling in the first place. Plus, Ego boosting is stupid.